Is my life cover policy tax deductible?
Life insurance in Australia is available as both a standalone retail policy or through a superannuation fund. Here is how tax treatment differs for these two forms of cover:
|Life insurance outside of super||Tax treatment|
|Life insurance funded through super||Tax treatment|
Conditions of life cover tax deduction
If your life insurance is through your super fund your premiums are tax-deductible. The general rule is that life insurance premiums, outside of superannuation, are not tax deductible but the benefit from a successful claim is tax-free.
Rules inside super
Tax is deductible when you pay for your premiums with your pre-tax income. Your super fund can claim a tax deduction on premium payments which is then passed onto you.
When you pay for your premiums with pre-tax income, this is known as a concessional contribution.
There are some conditions and restrictions after the age of 65:
|Financial year||Under 49||49 to 59||59+|
|2016/17 (Current year)||$30,000||$35,000||$35,000|
Source: ATO. When looking at previous years, consider your age at after 30 June of that financial year.
For this reason you should make yourself aware of how much you're allowed to contribute to your superannuation so that all the rules governing your fund are complied with.
Although you should go to an experienced financial or taxation adviser to obtain qualified information on your life insurance tax deductibility for your individual situation, in most cases you are generally unable to claim any deductions off your taxation liabilities for any life insurance premiums you had paid in the previous financial year. The same applies to premiums paid for critical care insurance or trauma insurance, in fact any total and personal disablement type of insurance. On the other hand premiums paid for income protection policies are fully claimable and the benefits are taxable as part of your normal taxable income.
Tax deductibility of life insurance inside superannuation
When purchasing life insurance through your superannuation fund you can also have the total premium cost paid from the fund savings as non-concessional contributions therefore attracting taxation deductibility, or in the case of employees under a salary sacrifice arrangement. If you require an additional coverage, buying extra life insurance through the fund via a salary sacrifice agreement with your employer will be highly recommended. Self-employed people can get the same tax deductible result via their concessional contributions. In short, you will not have to pay any tax on the premiums paid for the life insurance under these circumstances, as long as you are inside the concessional contribution cap and the benefits paid from superannuation funds will be taxable.
It's also possible to take advantage of government concessions when you place your life insurance inside your superannuation fund such as the federal government co-contributions for spouse and low income worker contributions. These types of incentives are not available if you take out your term life insurance outside of your superannuation fund. Concessional contributions within your superannuation fund include:
- Contributions provided by friends
- Personal before tax contributions if you are self employed
- Contributions regarded as being a "salary sacrifice"
- Additional contributions made by your employer
- Superannuation guarantee contributions
These contribution to your superannuation fund are treated as being part of the fund's assessable income and therefore become a taxable component within the fund generally.
On the other hand non-concessional contributions are contributions that are not included as part of the fund's assessable income and therefore constitute a tax-free component. These include:
- Proceeds from any small business sale
- Transfer of an overseas pension within six months of taking up residency in Australia
- Spouse contributions
- Personal contributions that you don't claim a tax deduction on
- Government co-contributions
- Any excess concessional contributions
Your personal contributions into your fund are only tax-deductible under the following conditions:
- If you were under the age of 18 and earned your income from carrying on a business or from employment.
- If the contribution is less than 10% of your assessable income, including fringe benefits for the one income year.
- The superannuation fund must be a complying fund under the law.
It follows that if the benefits are taxable the premiums paid for the cover will be tax deductible whereas if the benefits are tax free the premiums will not be tax-deductible. It can be complicated and it cannot be stressed enough that in these cases you should seek out the advice of an expert in taxation matters to lead you in the right direction. You don't want to get your tax calculations wrong and end up having to pay money back to the ATO.
The rule governing these matters can be roughly interpreted this way: life insurance premiums are in effect capital outlays and not taken as being an expense that has come about in earning an income from a business undertaking. Therefore life insurance tax deductibility cannot be allowed under the rules governing the general limitation on payments in the nature of capital outlays.
Life insurance tax deductibility is allowed when the following circumstances apply:
- When all or part of the premium has been collaterally assigned to a lending organisation, such as occurs when a mortgage is taken out and the lender requires such security.
- If the life insurance proceeds are to be received by a charity. In these cases the person paying the premiums is entitled to tax credits that are non-refundable.
- When the life insurance policy has been properly registered as a retirement savings plan, or superannuation fund plan. In this case part of the premium will attract life insurance tax deductibility.
- When you are covered by group insurance the premium amount paid by your employer is tax-deductible.